Practice Management

Tax credit could help some firms

But they must meet specific criteria to qualify under the health insurance reform law

Feb 20, 2011 @ 12:01 am

By Lavonne Kuykendall

A new health insurance tax credit could hit some small financial advisory firms in their sweet spot — but only if they fit a specific profile.

The Small Business Tax Credit, part of the Affordable Care Act signed into law by President Barack Obama on March 31, went into effect for the 2010 calendar year and is designed to help small businesses cope with the rising cost of health insurance.

Early reports about the tax credit focused on its restrictive eligibility rules, but RIA Database and InvestmentNews research suggests that some small advisory firms with just a handful of support staff members may benefit from the credit.

For a lucky few, the credit could cover as much as 35% of the premiums that they paid for employee health insurance in 2010 — if they make it through the complex rules.

“I think a lot of employers are unaware of it unless their accountants remind them,” said Russell D. Francis, president of Portland Financial Advisors Inc.

The sliding-scale tax credit covers businesses with fewer than 25 full-time employees and average annual wages of less than $50,000 that purchase health insurance for employees and contribute at least 50% of the total premium cost. The biggest break goes to companies with fewer than 10 employees and an average salary of less than $25,000.

Mr. Francis, who is a certified public accountant as well as a registered investment adviser, said that his firm, which has one employee aside from its owners, will be able to take the credit. It is early in the tax season, but he isn't aware of more than a couple of his 50 or so small-business tax clients who will qualify.

About 24,903 RIA firms in the United States have 10 or fewer employees, according to the RIA Database. Another 2,839 have between 11 and 50 employees, the next-largest category in the database.

According to the Moss Adams/ InvestmentNews 2010 Financial Performance Study of Advisory Firms, of the 612 firms it studied, 26.3% met all three criteria of having fewer than 25 employees, an average salary below $50,000 and company-paid benefits. The study didn't report how many paid more than half the benefits' cost.

“I thought we would qualify, but we didn't,” said Carolyn McClanahan, an adviser with Life Planning Partners Inc.

Dr. McClanahan, who is also a physician, said that she is one of the few advisers she knows of who has actually read all 2,000 pages of the health care insurance reform law. She regularly gives presentations explaining the legislation.

Dr. McClanahan's firm has one full-time employee and another who works about four-fifths of a full-time schedule. The eligibility requirements counted both employees' salaries but “rounded down” the full-time employee count to one, from 1.8, which pushed the average salary too high, she said.


Of her small-business clients, only one has been able to take the credit, a running-store owner with 20 store employees. Many of her clients are physicians who don't operate their own businesses.

In general, Ms. McClanahan thinks that smaller advisory firms are more likely to qualify than larger firms that have several highly compensated employees.

Rose Greene, who owns an eponymous financial services firm, said that her five-employee business is “in the sweet spot” that qualifies for the tax credit, which will be a big help to her.

“Providing health coverage for our own employees is very stressful on our cash flow,” she said.

Financial planner Rick Kahler of Kahler Financial Group has written an e-booklet on the health care insurance reform law and has concluded that the tax credit likely will benefit only a select and small group of small businesses.

Most financial planning firms with more than 10 employees probably won't qualify at all because firms of that size likely will have at least a few professional salaries that will push the average too high, he said.

Mr. Kahler stopped providing health insurance to his own employees a few years ago when costs began skyrocketing.

“I looked at the credit, and it was so small over 10 [employees] that it might not be worth worrying about,” he said of the sliding-scale credit. “My conclusion is that it pretty much affects people paying minimum wage.”

Terry Headley, president of the National Association of Insurance and Financial Advisors, said that interest in the credit is low because of the “limited benefit” of the credit to most small businesses. Those that qualify will benefit only to the degree that the tax credit is larger than the deduction employers are already allowed to take on health insurance premiums that they pay.

E-mail Lavonne Kuykendall at

“I THOUGHT we would qualify, but we didn't.”

Carolyn McClanahan


Life Planning Partners


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